Iron Finance Bank meets investors – lessons for all stablecoins?

Cryptocurrencies have been inundated by negative events recently. One of the most recent events was the Iron Finance Bank Run, which took place on June 16. Iron Finance is a multi-chain, partially secured stablecoin protocol, the main objective of which is to provide a linked stablecoin in dollars for use in DeFi applications. It is the first major bank to be active in the cryptocurrency market.

Iron Finance’s stablecoin, IRON, is a token secured with a single software, pegged to the US dollar and available on both the Polygon and Binance Smart Chain (BSC) networks. The security of the coin is secured in each of these networks by two different tokens. In the Polygon network, it is USD Coin (USDC) and TITAN tokens, while BSC is secured with Binance USD (BUSD) and STEEL tokens. The Polygon Network and Iron Finance are both protocols supported by billionaire Mark Cuban.

TITAN is the internal collateral token for the stablecoin IRON and is at the top of this bank alongside IRON. TITAN is distributed to liquidity providers (LPs) to bet on different liquidity pools. LP makes profits from transactions and allows liquidity for other investors to buy TITAN tokens.

As Cuban revealed on his blog on Yield Farming, Liquidity Provisioning, and Crypto Project Pricing, he’s one of those LPs for the record. He used his TITAN token on the QuickSwap exchange, which offers a TITAN / DAI trading pair on the platform. This resulted in Cubans bagging 100% of their trade profits when investors bought TITAN with Dai.

Soft pegs and partial mortgages have led to banking business

The bank run that caused investors, including Cubans, losses worth nearly $ 2 billion, was due to the price of the TITAN token. It jumped from trading around $ 10 on June 9th and hit an all-time high of $ 64.19 on June 16th. This high spurred a number of whales which started a domino effect as collateralization of part of the coin received more attention.

The market was then flooded with TITAN tokens, causing the price of the token to drop to nearly $ 0, resulting in a total loss of $ 2 billion. Since the stablecoin IRON is secured with TITAN in the polygon network, its soft price against the US dollar is also affected. The value of the token fell almost 30% almost immediately to trade in the $ 0.7 range. Scott Melker, a crypto trader and analyst, told Cointelegraph:

“Iron Finance has grown in popularity with productive farmers. LunarCRUSH already has the token at number 9 in popularity, and other social listening platforms have it in the top 10. Several large seller promotions show that Iron Finance is only partially secured. A big bank run crashed the system and destroyed the entire network. “

Algorithmic stablecoins like IRON are often difficult to design and maintain, both economically and technically. Michael Gasiorek, Head of Growth at TrustToken – creator of TrueUSD, a USD-pegged stablecoin – told Cointelegraph why this isn’t a carpet despite some concerns:

Iron Finance is not a ‘carpet pulling’ – the damage is not due to malice or overt theft, but simply symbolic inefficiencies and predictable intelligent contracting by people with technical skills and time to study the project design. “

Though Iron Finance announced that the USDC buyback for IRON will now resume after the protocol, the IRON price has not yet recovered to its original value of USD 1, so that all buybacks made will suffer losses. The company released an autopsy report analyzing the bank’s operations. The report mentioned that an IRON Stablecoin v2 will be launched at a later date.

Cuba demands regulation, but does it stifle innovation?

With Cuban being the most popular investor affected by the bank’s operations and the sole liquidity provider for the TITAN / DAI trading pair, his comments are in great demand in the internet financial market.

After the public debacle, Cubans called for regulation to “define what is a stable currency and what is acceptable collateral”. However, Gasiorek has a conflicting opinion on this, but emphasizes the importance of detailed research and argues that:

“Regulation is an important part of a mature investment sector, however [it] can stifle innovation in young and developing markets like cryptocurrencies. If you want to avoid losses, have a deep understanding of what you are investing in, be especially skeptical if you get a 1,000 percent return, and accept the enormous risk that comes with such a premium. And maybe don’t yell at regulators when the risk comes your way. “

Gregory Klumov, CEO and founder of Stasis – the company behind the largest euro stablecoin – added: “Any compulsory regulation has the potential to slow down the pace of innovation and appeal to customers. Self-regulation and gradual development are more strongly attracted by the decentralization of this area. “

Since stablecoins are widely used by crypto investors and liquidity providers while switching between positions in some cryptocurrencies and avoiding the liquidity of other cryptocurrencies, they are widely used in cryptocurrencies. In fact, the market capitalization of all major stablecoins has quadrupled from nearly $ 25 billion this year to over $ 100 billion today.

Paolo Ardonio, Chief Technology Officer of Tether – the company behind Stablecoin USDT – points to the tremendous potential of decentralized finance (DeFi) to increase financial inclusion for non-banks. In an interview with Cointelegraph he added: “All stablecoins are not created equal. With some projects there is a risk that everything goes to 0.

Could self-regulation be the way to go?

This is not the first time a stablecoin protocol has been scrutinized. Last year, Tether was at the center of attention when the New York attorney general filed a lawsuit against the company and Bitfinex for allegedly illegal activities and reserve-based market manipulation. After a legal battle that lasted through February of this year, the New York attorney general reached an agreement with Tether, paid a fine of $ 18.5 million and agreed to produce a report on the reserves.

Even so, USDT almost tripled its market cap this year, from $ 21 billion to around $ 63 billion at press time. Melker went on to elaborate on how Tether serves as an example of how a crypto company needs to combat the Fear, Uncertainty, and Doubt (FUD) created by liquidating in the market: “Dangerous regulators are looking for anything they can find in crypto can do space, and Tether is a great place to start because of its popularity and history. “

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Such stablecoin crashes can often indicate greater demand for central bank digital currencies (CBDCs) from an economy like the United States. However, a representative from the Bank of England, the UK’s central bank, spoke against the hype about stablecoins offering a “brave new world” and said regulators should not be treated any differently. “”

However, Gasiorek further emphasized that the risks of stablecoins also apply to CBDCs: “No technology is free from abuse and even CBDCs are unable to solve fraud or supply problems. We believe that CBDCs need to play a role alongside privately developed digital assets. “

As the race for the first global CBDC gets tougher and the importance of stablecoin in the crypto market continues to grow, regulators could play an important role in the future due to the massive influence of CBDC on the stablecoin market. Melker elaborated on the nature of this interaction between the two:

“CBDCs are inevitable because complete control of the money supply is central banks’ dream – not because of the failure of stablecoins. The world is moving digitally and money is not immune. This will lead to greater adoption of Bitcoin and other cryptocurrencies as people realize that with the digital dollar they are giving up their privacy and freedom. “